The industry has spoken, and the SEC has listened -- sort of. After a heated comment period, the regulator has passed into law a rule provisioning the electronic delivery of proxy voting materials as the industry standard. Initially proposed in December 2005, the rule drew criticism from opponents who believed that individual investors would prefer paper copies of shareholder documents and that the SEC's expectation that cost efficiencies would be realized was misguided. The Commission has tried to address these concerns in the final rule.
According to the new rule, a "notice and access" model will be adopted, by which issuers will make proxy materials available on a Web site and shareholders will be informed of the availability via a mailed proxy card, which specifies how to access the documents online. Issuers also must make paper copies available at the request of shareholders. The new rule, effective July 2007, is intended to reduce the cost of issuing proxy materials by eliminating the majority of printing, shipping and processing expenses that arise from paper-based proxy voting.
To avoid making the change unnecessarily abrupt, adopting the notice-and-access model is voluntary for issuers -- for now. The SEC has proposed that the notice-and-access model become mandatory beginning in 2008. That separate proposal currently is under deliberation. Some industry participants, however, believe that the strategy of phasing in the notice-and-access model may only lead to more confusion.
"It's a phased implementation, which I think is probably easier for the industry to swallow," says Pete Friz, project manager for global voting and transaction services at Institutional Shareholder Services (Rockville, Md.). "But it may lead to more questions from investors because it's not a big-bang flip of the switch."
While initial opponents to the rule suggested that a sudden overhaul of the system could scare investors away from adopting electronic delivery, the voluntary model may lead to a lack of consistency across the industry as to whether or not issuers choose to use the notice-and-access model. This inconsistency, some say, may alienate investors.
Additionally, the details of notifying investors may differ between issuers and further bewilder individual shareholders. "With these variations that the issuers are allowed to do, as far as subsequent mailings, what it could potentially do is allow investors to have a slightly different experience for different companies that they hold stock in," explains Friz.
Other observers predict these variations will have a much larger impact. "It's going to be extremely confusing," says Cynthia Richson, CEO of the IRRC Institute for Corporate Responsibility (Washington). "Even if it's just the organization of the materials, or the font size, or how you access the Web site and get the materials." Still, the phase-in plan is "the only reasonable, logical way to transition into solely electronic delivery," Richson concedes.